Topic 1 for Students Foreign Exchange Markets and Exchange Rates (1)

8/19/2019 Topic 1 for Students Foreign Exchange Markets and Exchange Rates (1)

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FOREIGN EXCHANGEMARKETS AND EXCHANGE

RATES


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Exchange Rates

The *rice o) one co'ntr(#s c'rrenc(ex*ressed in ters o) another co'ntr(#sc'rrenc(%

Most c'rrenc( is 5'oted in ters o) do""ars%

Consider the )o""o!ing 5'ote+E'ro .6%7689:4 49%8;


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Exchange Rates

• Direct 5'ote > the ao'nt o) hoec'rrenc( *er 'nit o) )oreign c'rrenc(%

RM?%@ : .6

• Indirect 5'ote > the ao'nt o)

)oreign c'rrenc( *er 'nit o) hoec'rrenc(

.9%@7 : RM6


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Exa*"e

S'**ose (o' are isiting 0o=a( and (o'!ant to ='( a so'enir that costs 6&999 IndianR'*ees% Ho! 'ch does it cost in ,%S% do""arsB

Exchange rate > ?%?


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Exa*"e

• I) a orsche costs 699&999 e'ro& ho!

an( do""ars !i"" (o' need to ='( itB


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ANSER


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Cross Rates

• S'**ose !e o=sere the )o""o!ing )orthe e'ro -4/ and the S!iss )ranc -SF/+

.6 : 4

.9%; : SF

-ass'e . is hoe c'rrenc(/• Then the a"'e o) 6 SF in e'ro is+

a"'e o) SF in . : a"'e o) 4 in .

> 9%; : 6 > 49%;:SF6


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Cross Rates

• S'**ose the *eso is !orth .9%98 andthe Canadian do""ar is !orth .9%89%

• The a"'e o) 6 *eso in Canadiando""ar -C./ is+

a"'e o) *eso in . : a"'e o) C. in .

> 9%98 : 9%89> C.9%69 : *eso


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Exercise 6

• Ass'e o"and#s c'rrenc( -the J"ot(/is !orth .9%68 and the 2a*anese (enis !orth .9%99%

• Ho! an( (en e5'a" a J"ot(B


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Ans!er


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Triang'"ar Ar=itrage

S'**ose !e o=sere the )o""o!ing )orthe e'ro -4/ and the S!iss )ranc -SF/+

.6 : 4

.9%;9 : SF

S'**ose (o' hae .699 and the crossrate is 5'oted as 4 *er SF > 9%?9%

hat !o'"d (o' doB


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• Cross rate is 5'oted as 49%?9 *er SF• The act'a" a"'e is+

a"'e o) SF in . : a"'e o) 4 in .

> 9%;9 : 6> 9%;9 : SF

• At 49%?9 *er SF+

SF is chea*er than its act'a" a"'e%

hat !o'"d (o' doB


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• To ake one(& ='( "o! and se""high%

• So& se"" e'ros to ='( S!iss )rancs%


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6%Ass'e (o' hae .699

@%0'( 699 e'ros )or .699

7%,se the 699 e'ros to ='( S!iss )rancs+

The exchange rate is 4 9%?9 : SF4699 : 9%?9 > SF@;9

7% ,se the SF@;9 to ='( do""ars+

The exchange rate is .9%;9 : SF

SF@;9 x 9%;9 > .6@; • o' ake a *ro$t o) .@;


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Exercise @

S'**ose+

.6%8 : 1

.9%;9 : SFand the cross rate is 5'oted as SF7 : 1%

Ex*"ain ho! to go a=o't aking soeone(%

Ass'e (o' hae .699%


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Ans!er


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Exercise 7

hich !o'"d (o' rather to hae& .699 or1699B Ex*"ain

@% hich !o'"d (o' rather to hae& SF699 or1699B Ex*"ain


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Ans!er

• .699 or 1699B


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Exercise ?

S'**ose the 2a*anese (en exchangerate is 36 > .9%99


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Ans!er 6

6%Cross rate -3 : 1/ +


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Ans!er @


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Exercise ;

a"'e o) Canadian do""ar in ,%S% do""ar is.9%


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Ans!er


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Exercise

Toda( (o' notice the )o""o!ing exchangerate 5'otations+

.6 is e5'a" to 7%99 Argentine *esos

6 Argentine *eso > 9%;9 Canadiando""ars

o' need to *'rchase 699&999 Canadian

do""ars !ith ,%S% do""ars%Ho! an( ,%S% do""ars !i"" (o' need )or(o'r *'rchaseB


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Ans!er


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Exercise 8

• Ass'e the e'ro a**reciated againstthe do""ar%

• Did the direct exchange rate o) thee'ro increase or decreaseB

• Did the indirect exchange rate o) thee'ro increase or decreaseB


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ANSER

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Topic 1 for Students Foreign Exchange Markets and Exchange Rates (1)